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ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED v. THE COMMISSIONER OF INCOME TAX

Supreme Court Of India

Mar 2, 2021

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

The Supreme Court of India pronounced judgment on 2 March 2021 in a large batch of civil appeals and special leave petitions led by Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax & Anr. The matters arose from decisions of the High Courts of Karnataka and Delhi and a ruling of the Authority for Advance Rulings (AAR). Although the detailed facts are not reproduced in the record excerpt, the controversy centred on whether payments made by Indian distributors or end-users to foreign software suppliers attract deduction of tax at source under Section 195 of the Income-tax Act, 1961.

Legal Issues Presented

Whether consideration paid by resident Indian distributors/end-users to non-resident computer-software manufacturers or suppliers, under distribution agreements or End-User Licence Agreements (EULAs), constitutes “royalty” within Article 12 of the applicable Double Taxation Avoidance Agreements (DTAAs) and Section 9(1)(vi) of the Income-tax Act, thereby obligating deduction of tax at source under Section 195 of the Act.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Citrix Systems (AAR)	Advance ruling that characterised similar software payments as royalty.	The Supreme Court expressly set aside this ruling, holding that the payments did not amount to royalty under the DTAAs or domestic law.

Court's Reasoning and Analysis

The Court’s analysis, distilled from paragraphs 168–170 of the judgment, proceeded as follows:

The definition of “royalties” in Article 12 of the relevant DTAAs (enumerated earlier in the full judgment) governs the taxability of the impugned payments.
Under those treaty clauses, a payment qualifies as royalty only if it grants the payer the use of, or the right to use, a copyright.
The distribution agreements and EULAs in question merely permit resale or use of packaged computer software; they do not transfer any copyright or create any interest in the underlying intellectual property.
Consequently, the payments are not “royalty” either under the DTAAs or under Section 9(1)(vi) of the Income-tax Act (including Explanations 2 and 4 thereto).
Because the payments do not constitute royalty, they do not generate income taxable in India in the hands of the non-resident suppliers, and Section 195 does not oblige Indian payers to deduct tax at source.
This conclusion applies uniformly to all four factual categories identified earlier in paragraph 4 of the judgment.

Holding and Implications

Holding: The Supreme Court allowed the appeals arising from the Karnataka High Court, setting aside those judgments and the AAR ruling in Citrix Systems. The appeals challenging the Delhi High Court judgments were dismissed. It answered the central question by declaring that payments for resale/use of computer software by Indian distributors or end-users do not constitute royalty and therefore do not attract tax deduction at source under Section 195 of the Income-tax Act.

Implications: The decision relieves Indian purchasers of off-the-shelf or distribution-licensed software from withholding obligations on payments to foreign suppliers, so long as no copyright interest is conveyed. It clarifies the interaction between domestic tax provisions and treaty definitions of royalty but does not create any new statutory rule beyond interpreting existing DTAAs and the Income-tax Act.

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ITEM NO.1501 Court 3 (Video Conferencing) SECTION IV-A

S U P R E M E C O U R T O F I N D I A

RECORD OF PROCEEDINGS

Civil Appeal No(s). 8733-8734/2018

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE

PRIVATE LIMITED Appellant(s)

VERSUS

THE COMMISSIONER OF INCOME TAX & ANR. Respondent(s) ([ HEARD BY : HON'BLE ROHINTON FALI NARIMAN, HON'BLE HEMANT GUPTA AND HON'BLE B.R. GAVAI,JJ.]

(IA No. 103490/2020 - APPLICATION FOR TAGGING/DETAGGING) C.A. No. 10114/2013 (IV-A)

C.A. No. 10112-10113/2013 (IV-A)

C.A. No. 10106/2013 (IV-A)

C.A. No. 10115-10117/2013 (IV-A)

C.A. No. 10103/2013 (IV-A)

C.A. No. 10104/2013 (IV-A)

C.A. No. 6386-6387/2016 (XIV-A)

C.A. No. 10098-10102/2013 (IV-A)

C.A. No. 10758/2017 (XIV-A)

C.A. No. 8735-8736/2018 (IV-A)

C.A. No. 8737-8941/2018 (IV-A)

C.A. No. 8942-8947/2018 (IV-A)

C.A. No. 8950-8953/2018 (IV-A)

C.A. No. 8948-8949/2018 (IV-A)

C.A. No. 4420/2012 (IV-A)

C.A. No. 8954-8955/2018 (IV-A)

C.A. No. 8956/2018 (IV-A)

C.A. No. 8957/2018 (IV-A)

C.A. No. 8959/2018 (IV-A)

C.A. No. 8962/2018 (IV-A)

C.A. No. 8958/2018 (IV-A)

C.A. No. 4629/2014 (IV-A)

C.A. No. 4631/2014 (IV-A)

C.A. No. 4630/2014 (IV-A)

C.A. No. 10105/2013 (IV-A)

C.A. No. 7852/2012 (IV-A)(FOR AMENDMENT IN CAUSE TITLE ON IA 115452/2020)

C.A. No. 4634/2014 (IV-A)

C.A. No. 8974-8975/2018 (IV-A)

C.A. No. 8966/2018 (IV-A)

C.A. No. 8973/2018 (IV-A)

C.A. No. 8963/2018 (IV-A)

C.A. No. 8965/2018 (IV-A)

C.A. No. 8972/2018 (IV-A) C.A. No. 8961/2018 (IV-A) C.A. No. 8969/2018 (IV-A) C.A. No. 8960/2018 (IV-A) C.A. No. 8971/2018 (IV-A) C.A. No. 8970/2018 (IV-A) C.A. No. 8964/2018 (IV-A) C.A. No. 8967/2018 (IV-A) C.A. No. 8968/2018 (IV-A) C.A. No. 1403/2013 (IV-A) C.A. No. 1412/2013 (IV-A) C.A. No. 1416-1418/2013 (IV-A) C.A. No. 1421/2013 (IV-A) C.A. No. 1415/2013 (IV-A) C.A. No. 1414/2013 (IV-A) C.A. No. 1413/2013 (IV-A) C.A. No. 1407/2013 (IV-A) C.A. No. 1406/2013 (IV-A) C.A. No. 1408/2013 (IV-A) C.A. No. 8990/2018 (XIV-A) C.A. No. 1405/2013 (IV-A) C.A. No. 1410/2013 (IV-A) C.A. No. 1409/2013 (IV-A) C.A. No. 1419/2013 (IV-A) C.A. No. 1411/2013 (IV-A) C.A. No. 1420/2013 (IV-A) C.A. No. 1404/2013 (IV-A) C.A. No. 2304/2013 (IV-A) C.A. No. 2305/2013 (IV-A) C.A. No. 2306/2013 (IV-A) C.A. No. 2307-2308/2013 (IV-A) C.A. No. 4666-4667/2013 (IV-A) C.A. No. 6764/2013 (IV-A) C.A. No. 8976/2018 (IV-A) C.A. No. 8977-8988/2018 (IV-A) SLP(C) No. 28867/2016 (XIV) SLP(C) No. 28868/2016 (XIV) C.A. No. 10673/2016 (XIV-A) SLP(C) No. 29571/2016 (XIV) C.A. No. 10674/2016 (XIV-A) SLP(C) No. 36782/2016 (XIV) SLP (C) No. 37580/2016 (XIV) C.A. No. 3402/2017 (IV-A) C.A. No. 4419/2012 (IV-A) C.A. No. 10097/2013 (IV-A) C.A. No. 9486/2017 (XIV-A) C.A. No. 8711/2018 (XIV-A) C.A. No. 8722/2018 (XIV-A) C.A. No. 8725/2018 (XIV-A) C.A. No. 8724/2018 (XIV-A) C.A. No. 9551/2018 (XIV-A)

SLP(C) No. 450/2019 (XIV) C.A. No. 2006/2019 (IV-A) IA No. 124352/2019 - CONDONATION OF DELAY IN FILING) SLP(C) No. 6736/2020 (XIV)

(IA No.37514/2020-CONDONATION OF DELAY IN FILING) Date : 02-03-2021 These matters were called on for pronouncement of Judgment today.

Counsel for the

parties : Mr. Arvind P. Datar, Sr. Adv.

Mr. S. Ganesh, Sr. Adv.

Mr. Percy Pardiwala, Sr. Adv.

Mr. Mukesh Butani, Adv.

Mr. Shreyash Shah, Adv.

Mr. Shankey Agarwal, Adv.

Mr. Tarun Jain, Adv.

Mr. H. Raghavendra Rao, AOR

Mr. Tushar Mehta, SG

Mr. Balbir Singh, ASG

Mr. K. Radhakrishnan, Sr. Adv.

Mr. Rupesh Kumar, Adv.

Mr. Rajat Nair, Adv.

Mr. Zoheb Hussain, Adv.

Mr. D.L. Chidananda, Adv.

Mrs. Anil Katiyar, AOR

Ms. Anuradha Dutt, Adv.

Mr. Sachit Jolly, Adv.

Mr. Tushar Jarwal, Adv.

Mr. Rohit Garg, Adv.

Mr. Rahul Sateeja, Adv.

Ms. Disha Jham, Adv.

Mr. Vasudevan G., Adv.

Ms. B. Vijayalakshmi Menon, AOR

Mr. Ajay Vohra, Sr. Adv.

Ms. Kavita Jha, AOR

Mr. Anant Mann, Adv.

Mr. Udit Naresh, Adv.

Mr. Percy Pardiwala, Sr. Adv.

Mr. T. Suryanarayan, Adv.

Ms. Tanmayee Rajkumar, Adv.

Ms. Yugandhara Pawar Jha, Adv.

Ms. Manasa Ananthan, Adv.

Mr. Kunal Verma, AOR

Mr. Preetesh Kapur, Sr. Adv.

Mr. Senthil Jagadeesan, AOR

Ms. Mrinal Kanwar, Adv.

Ms. Sonakshi Malhan, Adv.

Ms. Suriti Chowdhary, Adv. Mr. Percy Pardiwala, Sr. Adv. Mr. Senthil Jagadeesan, AOR Ms. Mrinal Kanwar, Adv. Ms. Sonakshi Malhan, Adv. Ms. Suriti Chowdhary, Adv. Mr. A. Shankar, Sr. Adv. Mr. Senthil Jagadeesan, AOR Mr. S. Annamalai, Adv. Ms. Mrinal Kanwar, Adv. Ms. Sonakshi Malhan, Adv. Ms. Suriti Chowdhary, Adv. Mr. Salil Kapoor, Adv. Ms. Ananya Kapoor, Adv. Mr. Sumit Lalchandani, Adv. Mr. Sanat Kapoor, Adv. Ms. Soumya Singh, Adv. Mr. Kamal Mohan Gupta, AOR Mr. V. Balachandran, AOR Mr. K.R. Vasudevan, Adv. Mr. Siddharth Naidu, Adv. Mr. Kishore Kunal, AOR Mr. Manish Rastogi, Adv. Ms. Tanushree Jain, Adv. Mr. Parth Jaiprakash, Adv. Mr. Jagjit Singh Chhabra, AOR Ms. Vanita Bhargava, Adv. Mr. Ajay Bhargava, Adv. Ms. Trishala Trivedi, Adv. Ms. Maithili Moondra, Adv. for M/s. Khaitan & Co., AOR Mr. G. Sridhar, Adv. Ms. Gayatri Gulati, Adv. Mr. Siddharth Vasudev, Adv. Mr. Rahul Unnikrishnan, Adv. Mr. Sandeep Bagmar, Adv. Mr. T. V. S. Raghavendra Sreyas, AOR Mr. Ambhoj Kumar Sinha, AOR Mr. Vishal Kalra, Adv.

Mr. S.S. Tomar, Adv.

Mr. Anil Kumar Gautam, AOR

Mr. Debmalya Banerjee, Adv. Mr. Kartik Bhatnagar, Adv. Ms. Astha Prasad, Adv. Mr. Rohan Sharma, Adv. Mr. Ujjwal Singh, Adv. Mr. Vardaan Wanchoo, Adv. for M/s. Karanjawala & Co., AOR Mr. Rony Oommen John, AOR Mr. Piyush Swami, Adv.

Mr. Arshdeep Singh, Adv. Mr. G.C. Srivastava, Adv. Mr. Suvinay Kumar Dash, Adv. Mr. Piyush Sachdev, Adv. Ms. Runamoni Bhuyan, AOR Mr. Jagjit Singh Chhabra, AOR Ms. Kavita Jha, AOR

Mr. Senthil Jagadeesan, AOR Mrs. Anil Katiyar, AOR Mr. Anil Kumar Gautam, AOR Mr. V. Balachandran, AOR Ms. B. Vijayalakshmi Menon, AOR Mr. Kunal Verma, AOR

Mr. Rony Oommen John, AOR M/S. Karanjawala & Co., AOR M/S. Khaitan & Co., AOR Mr. Ambhoj Kumar Sinha, AOR Mr. H. Raghavendra Rao, AOR Mr. T. V. S. Raghavendra Sreyas, AOR Ms. B. Vijayalakshmi Menon, AOR Mr. Kamal Mohan Gupta, AOR Ms. Runamoni Bhuyan, AOR Mrs. Anil Katiyar, AOR Mr. Kishore Kunal, AOR Hon'ble Mr. Justice Rohinton Fali Nariman pronounced the reportable Judgment of the Bench comprising His Lordship, Hon'ble Mr. Justice Hemant Gupta and Hon'ble Mr. Justice B. R. Gavai. Leave is granted in the Special Leave Petitions. The operative portion of the Judgment is reproduced as under :-

" CONCLUSION

168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.

169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any

income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.

170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed."

Pending interlocutory application(s), if any, is/are disposed of.

(JAYANT KUMAR ARORA) (NISHA TRIPATHI)

COURT MASTER BRANCH OFFICER

(Signed reportable Judgment is placed on the file)